Cantech Letter interviews Brett Davidson, CEO of Wavefront Technology

Davidson: "If you look at our gross margins in Canada, they are upwards of 85%, that's unheard of. In the US, that number is around 77%. We get to those kind of gross margins through effective operations, not chasing things we can't control. "

Edmonton’s Wavefront Technology (TSXV:WEE) takes physics to the oil patch. Beginning with research done at the University of Waterloo, Wavefront researchers managed to figure out the physics that caused fluid changes after earthquakes and how to apply the now patented process to the injection of fluids for enhanced oil recovery and groundwater clean up.

While Wavefront’s stock has been a roller-coaster, with three major spikes and retreats since 2006, the company is beginning to show real success in commercializing its science, having now recorded six consecutive quarters of increased revenue. Cantech Letter’s Nick Waddell caught up with Wavefront President and CEO Brett Davidson in Vancouver yesterday to talk about the roots of the company’s long journey from concept to reality.

Brett, you seem to be on the verge of full commercialization with Powerwave, can you take us back to the beginnings and describe how Wavefront got here?

In 1996, I was involved with a group called the Porous Media Research Institute, that was run by a guy named Maurice Dusseault. I used to work for Maurice. We had academic members from all over the globe and we studied issues related to fluid flow in the ground, amongst other things. So it could be environmental, oil and gas, mining. We were doing a research project where we were going to try and recreate an earthquake using seismic technologies. Well actually, we weren’t trying to recreate an earthquake, we were trying to mimic the energy from an earthquake, taking things like vibro seismic trucks that are used in the exploration business for delineating reservoirs and trying to concentrate that energy down to the reservoir. One of my academic partners, Tim Spanos, who later became part of Wavefront, had been working on a theory for about 16 years.

So this is long before fraccing came into the public lexicon…

Yeah, before all of it. Tim, along with other scientists in Russia, China and the US, had noticed that when there was an earthquake you would get increased oil production in California, geyser activity would go up. The USGS wrote that stream and other water levels went up. Back in 1967, when we had the big Alaskan earthquake, Spanos noticed that the reports of oil well productivity increases happened two days after the earthquake. There was a delayed reaction. If the reaction was immediate, would could have chalked it up to waves associated with seismic activity, such as compression waves. The science at the time suggested that Edmonton, for instance, should have seen these increases a couple hours after, not a couple of days. A lot of researchers were looking at these fast moving waves. But Spanos said “Gee, this has got to be a slower moving phenomenon” And that slower moving phenomenon was traveling about eighty to 300 metres per second. Coincidentally, that’s about what tsunami travels at across the ocean after an earthquake. So Tim convinced me to spend a month with him in Alberta, in January, 1997 to take this theory and some previous work he had done and prove it up, take measurements. Would it work? Could we measure its efficacy if I induced a seismic source? These were the kinds of questions we wanted to answer. But literally after the first week of experiments I was convinced that his methods were far superior to anything else. The problem was, at that time, it didn’t agree with my education.

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Geo-technical technology, I am technologist by trade. But I have a geology and civil engineering background. I was trained that there was one way fluid could flow. But Spanos discovered that there was a new way fluid could flow. No one had identified this. Now the trick was how do you take what we discovered. Some of the experiments showed fluid moving against gravity without a pump, uphill. I knew there was something we had here. Spanos had identified it theoretically, but no one had ever demonstrated it visually or quantitatively, and I did that. All of us we all had that moment of “Now what? What do we do this now? Because at the time, I wasn’t working with the university anymore, I had left and started a consulting company designing mines, and Tim and Maurice were still professors. I was doing this as a favour to Tim. At the time we thought that every oil company in the world is going to want this technology. Pretty naive of us. When we went to these oil companies, we go in and they say “Great story, great initial lab work, but you have to do it in the field to convince us”.

Had you taken your data and turned it into concepts and practices?

We had. We had tool designs and a “how to” ingredient book, if you will. But they weren’t interested in the ingredient book, they were interested in execution. The trick then became to demonstrate it in the field. So we convinced a company called Wascana Energy to allow us to have a certain section of their field, as long as we paid for the bulk of the experiment. The reason Wascana agreed to it was because the people running their research group at the time were physicists. They studied Tim’s physics and thought it was great and wanted to see if it would work in the field. That was the first real break for us.

It seems as though you went from theory to practice rather quickly here..

Yeah within two years.

So how did you replicate the effects of an earthquake and turn it into a device that could be transported and mass produced?

Well, in the lab it was easy to do. I mean you can do it with a rubber mallet. Now we had to go in the field and make a pulsing device that does this down-hole. We had the field donated to us. Then, we then got a grant from the Alberta government, back in the day it was called the Alberta Oil Sands Technology Research Authority. We then put in a bunch of our own money. We were predominantly self-funded. Around November, 1997 we started the work of getting the technology into the field. We had formed a private company with the three of us as shareholders. November, 1998 we actually launched the first field trials. The device we originally designed came on two transport trucks, so it wasn’t very user friendly and it had to be babysat almost twenty-four hours a day. Nonetheless, we had some fabulous results. At our first attempt, Tim had predicted a 35% increase in production, and we got 34%. But in February, 1999 oil was $9 bucks a barrel. People were barely surviving, the industry was decimated. But we had put all this money into this thing, so we started up in Lloydminster a business line in which we took our technology around well stimulation and made that a business for a while, and that’s how we survived. But we realized that our tools would limit our capability to move forward in the future. We did a few more research oriented experiments, and only used those tools up until 2002.

By 2002, you are looking to raise money?

Yep, we started to look to raise money by going public. We knew we had to develop tools that could go down the well, that are long-lasting and consistent. By 2005 we had developed a better tool. We had tried it for about eighteen months and after that we figured we had something we could commercially offer to the industry. We picked up our first commercial client in September 2007, and that client is still with us today. In 2007, we had three tools in the ground. Our last number, I think, was 128. So we have seen a pretty significant growth of the acceptance of the technology. It’s really predicated on the economic results. One down side of Wavefront is that many of the end users won’t allow us to use their name, so we can’t shout out our accomplishments, in one sense.

Why won’t your clients allow you to mention them?

The first reason we are given is that its for competitive reasons; they don’t want their neighbouring operator to know what they are using in their field. The second one is that they don’t want us to make our company on the back of their name. Does it hurt sales? A little. But lately were a getting permission to name companies and you’ll see a few of our recent press releases do. But if I go to a meeting in downtown Calgary people already know who we’re working for. Nonetheless, the adoption curve is steep. The next step is getting large clients to fill repeat orders. We need to develop several anchor clients.

So had Alberta acted as a de facto demonstration market for your technology?

The tendency to try things is greater because the difficulty in getting things is hard. Sometimes the cards aren’t in your favour so you have to be more innovative. But we did have to overcome a reluctance to try things, because nobody wants to be first. So that slows adoption. I point to the adoption curve for horizontal drilling, for instance. It was introduced in the 70’s, but took probably 15 -20 years to gain acceptance. The advent of multi-stage fracturing came because we had these very tight reservoirs and to open up permeability you had to break the rock in multiple locations. In Canada, and the Western Canadian Sedimentary Basin in general there is lot more technology development than anywhere else in the world. The oil sands have a propaganda machine on both ends of the equation, but we don’t pat ourselves on the back enough for the innovations that we have developed. You look at what Wavefront has developed. It’s a game -changing technology for the industry. It truly is. And that was developed in Alberta. Western Canada in general is a great place to do this.

Wavefront's first PowerWave prototypes were delivered on two transport trucks. Today, the company often Fed-Ex's the units.

How scalable is your business? Can you produce the next Powerwave product cheaper than the last one?

Yes, in fact our efficiencies are improving. If you look at our tool, five years ago that would cost us $30,000, today it’s half that price. So we are getting much more efficient, as you should. Everywhere we look at tool development we are looking for efficiencies. We have come from two transport trucks to something I can Fed-Ex. Some people ask why it has taken so long to get where we are, but if we hadn’t taken the time to get to where we are, we wouldn’t here today. Sometimes it’s true that you have to take a few steps backward to go forward.

You have also had a lot of feedback from your clients…

Yes, that’s how we developed a lot of our tools. I think a lot of time when small companies are developing technologies there’s a tendency to say “Well, we’re the experts”. But there’s a lot of good ideas out there, a lot of positive suggestions that people make. People know their business, so we stress the importance of listening. We can’t be bulls in a China shop, we have to respond to what our clients and the industry want. I don’t care how good your technology is, if your stubborn and you don’t constantly improve, you won’t get there. We also have to accept the fact that there will be copycats, so we have to stay ahead of the game. There is strength in patents, and we have a multitude of patents, but we know that if we have positive results there is gong to be competition.

You have had six consecutive quarters of revenue growth. What can investors expect in the next year from Wavefront?

Well, I think we have already stated publicly that our focus points have been Western Canada California and Texas. We don’t want to blow our brains out trotting all over the globe spending millions of dollars with minimal success. We want to establish traction, so we look at where there is a predominance of wells. Texas has the most wells of any jurisdiction in the world, California is a close second, I think. Canada has tons. Right in our own back yard we have a lot of opportunity. But that doesn’t mean were not going to go out and secured contacts elsewhere. We have active installations with PlusPetrol in Argentina. We’re soon to have active installations in Oman. We’re going to look at Colombia and Brazil because there is great activity going on in those areas, and we have traction. But we’re not going to look at what amount to fringe markets for us. We’re not looking at China, we’re not looking at India, we’re not looking at Nigeria. In short, we’re not going to chase work. In the jurisdictions we have identified we want to execute properly. If you look at our gross margins in Canada, they are upwards of 85%, that’s unheard of. In the US that number is around 77%. We get to those kind of gross margins through effective operations, not chasing things we can’t control. For us its about building a sustainable company, one that’s well respected with good corporate governance, and we think the share price will follow. Our main goal is to get to profitability. We’re not burning a ton of money right now; our cash burn is about $500-$550 per quarter. We’re getting closer.

Will the cash position you have now sustain you until you are profitable?

Well, we have more than $20 million in the bank. That will get us to profitability. I won’t go as far as saying we will never do another financing, because you never know what will happen, we may want to make an acquisition of a larger company, for instance. What if someone came up to us with an order for ten-thousand tools? Of course we would look at all our financing options. But you look at Wavefront today, and we have no debt, lots of cash. We’re in good shape. Wavefront has a great future. From an investment standpoint, if someone is thinking about investing in Wavefront know that we’re not about immediate gratification or overnight success. But I believe we will get there because of the strength of our technology, and our people.

About Nick Waddell

Cantech Letter founder and editor Nick Waddell has lived in five Canadian provinces and is proud of his country's often overlooked contributions to the world of science and technology. Waddell takes a regular shift on the Canadian media circuit, making appearances on CTV, CBC and BNN, and contributing to publications such as Canadian Business and Business Insider.